Executive Summary
The third quarter of 2024 was strong for stocks and most stock benchmarks achieved new record highs with support from strong readings for U.S. GDP growth, a resilient job market and an accommodative Federal Reserve that has shifted its focus from fighting inflation to supporting jobs. The first Fed cut was 0.5% this past September after the overnight lending rate was held constant since the last rate hike in July of 2023. The dollar has declined since the rate cut and most foreign currencies had a strong third quarter, which helps international returns. Small Cap Value stocks have also done well, while Large Cap Growth stocks have underperformed. We did have volatility during the quarter and expect more volatility this quarter.
International developed stocks picked up during the third quarter, but more than half of the return was due to currency movements. The EU and Japan will have to improve economic growth to keep the stock momentum going. China announced enough stimulus to send emerging market stocks up 20% during September and the first week of October but disappointed stocks markets in Asia with the next round of expected stimulus, resulting in a 5% pullback. Both international developed markets and emerging markets have a much lower valuation than the U.S. stock market and are an important part of our diversification.
We remain cautious due to the high valuation of U.S. stocks but remain optimistic on global economic growth and the strong momentum in stocks. The S&P 500 Price to Sales ratio is hovering around 3, which is near its all-time peak of 3.23, reached in December of 2021. Inflation continues to cool and has provided the catalyst for U.S. small cap stocks to outperform, since they were at a 25-year low in relative valuation compared to U.S. large cap stocks at the end of last quarter. We look forward to seeing as many of you as we can in the coming months with events on the east coast and west coast.
For those who would like a deeper dive into the details, please continue reading…
World Asset Class 3rd Quarter 2024 Index Returns


The third quarter of 2024 was very positive for all major markets. The best return was found in Global Real Estate Stocks, which returned 16.04%, well above the asset class’s average quarterly return of 2.3%. For the total U.S. Stock Market, the third quarter return of 6.23% was well above the average quarterly return of 2.4% since January 2001. International Developed Stocks returned 7.76%, also well above the long-term average quarterly return of 1.7%. Emerging Market Stocks returned 8.72%, well above the average quarterly return of 2.6%. The U.S. Bond Market was up a strong 5.2%, well above its average quarterly return of 1.0%, while the Global Bond Market (ex U.S.) was up 3.48%, above its average quarterly return of 1.0%.
Here is a look at broad index returns over the past year and longer time periods (annualized):


For the past year ending 9/30/2024, U.S. stocks led all broad categories with a positive return of 35.19%, International Developed stocks were up 24.98%, Emerging Markets stocks were up 26.05%, and Global Real Estate stocks were up 30.43%. The U.S. Bond Market gained 11.57% and Global Bonds were up 9.78% for the past year. Over the past five years, U.S. stocks were up 15.26% annually, while International Developed stocks were up 8.36% annually, Emerging Market stocks were up 5.75% annually, and Global Real Estate stocks were up 2.54% annually. The U.S. Bond Market was up 0.33% annually for the past five years, while Global Bonds were up 0.64% annually. Over the past 10 years, the U.S. stock market (up 12.83% annually) is well ahead of International Developed (up 5.68% annually), Emerging Market stocks (up 4.02% annually) and Global Real Estate stocks (up 4.92% annually). U.S. Bonds were up 1.84% and Global Bonds were up 2.62%, annually, over the last 10 years.
Taking a closer look within U.S. stocks during the third quarter, Small Cap Value took the top spot, up 10.15%. Large Cap Value stocks (up 9.43%) were slightly above Small Cap stock index results (up 9.27%). At the bottom was Large Growth, which was up 3.19%. Within large cap growth, the “magnificent 7 stocks”, all highly valued, underperformed during the quarter.

Small cap value stocks performed well along with the regional banking ETF, symbol KRE. During the third quarter, KRE was up over 20% and finished the quarter up 15.8%. Regional banks are working through the challenge of higher interest rates and commercial real estate loans. Many investors picked up on the relative valuations of small-cap stocks compared to large-cap stocks near their lowest levels in 25 years at the start of the third quarter.
If we extend our analysis of U.S. stocks over longer time periods, Large Growth stocks still led over the past year, up 42.19% vs. 27.76% for Large Value. Large Growth has been the top returning asset class over the past 3, 5, and 10 years.


The U.S. business cycle continues to slow as measured by leading indicators; however, 2nd quarter GDP was a robust final reading of 3%. The first quarter GDP growth final estimate was 1.4% (annual rate), much lower than Q4 of last year, which was revised up to a final reading of 3.4%. GDP growth for the full year 2023 was 2.5%. For 2024, GDP growth is expected to also be 2.5%, the latest consensus expectation for 2024 Q3 is for 1.8% growth, up from prior forecasts of 0.8%. A big reason why the bull market continues in stocks is due to higher than expected GDP growth rate. It is difficult to see a recession with the job market still strong. The four-week moving average of initial claims for unemployment insurance is heading up but remains just above the lowest levels in the last year, which means the U.S. job market remains very tight; and until it falters, we are not likely to experience a recession in the near term. Companies are making strong capital investments to take advantage of the productivity boost from AI and more powerful computing.
Another reason why the jobs market is so strong is the robust fiscal spending, which is adding another $1 trillion to the national debt every 100 days or about $3.6 trillion annually. The pace of fiscal spending isn’t sustainable and the hope is that a slowdown in fiscal spending will not cause a recession. The Fed has started cutting rates and has now cut in half the value of Treasuries and mortgages it sells from a monthly pace of just under $100 billion, to $50 billion.
Moving on to International Developed stocks, which were positive in local currency and much more positive in dollars for the quarter, due to currency movements. Small Cap stocks led the third quarter, up 10.45%, after currency adjustment (up 3.63% locally). Growth Stocks were up 5.87% in U.S. dollars, up only 0.06% in local currency, since the dollar weakened against most foreign currencies during the third quarter. The Euro went from $1.07 last quarter to end the third quarter at a value of $1.12. The currency effect served as a strong tailwind, helping international stock returns during the third quarter. Our investment funds are priced in U.S. dollars (unhedged) and benefit from a weakening U.S. dollar:

Over longer time periods, the value premium (value-growth) is positive year to date (YTD), slightly negative over the past one-year period and positive over the 3 and 5-year period, but still slightly negative for 10 years. The size factor premium (small cap-large cap) is positive in the quarter, negative in the 1-year, 3-year and 5-year periods, and positive for the past 10 years (5.99% vs. 5.68%):


Moving the commentary to fixed income, bond market returns around the world were strong during the third quarter, as yields decreased for most bond maturities. The yield on the 5-year Treasury note decreased by 75 basis points, ending the quarter at a yield of 3.58%, down from 4.33%. The yield on the 10-year Treasury note decreased by 55 basis points, ending the quarter at a yield of 3.81%, down from 4.36%. And the 30-year Treasury bond yield decreased by 37 bps to 4.14%, down from 4.51%. As yields decrease, bond prices increase, and lower borrowing costs make it easier for consumers and corporations to use debt, including auto loans and mortgages. Here is the U.S. yield curve, and you can see how yields decreased slightly for all maturities (current yield curve in grey, one quarter ago in blue, and one year ago in green):

Looking at fixed income asset classes, the highest third quarter bond return was for the longest duration Government Bond Index Long (long-term Treasuries, up 7.81%), followed by the U.S. High Yield Corporate Bond Index (up 5.28%), then the U.S Aggregate Bond Index (up 5.20%), while the 3-Month Treasury Bill Index was down at the bottom, up 1.37% for the quarter. It is worth noting that the long bond index is down -8.32% annually for the past three years and down -4.25% annually over the past five years. Long duration bonds can have significantly negative returns during periods of rising interest rates. Here are the fixed income period returns:

The stock market considers hundreds of factors to determine asset prices, some more important than others. One cannot time markets and typically the short term is just noise. Here is a sample of how the world stock markets responded to headline news, during the last quarter and the last year (notice the insert of the second graph that compares the last 12 months to the long term). We encourage you to tune out the financial news, since major news sources have a bias toward negative headlines; and often the headlines of the day have very little to do with the direction of stocks.


CONCLUSION
The third quarter was strong for U.S. and Emerging stocks; and the drop in yields helped bond and real estate returns. Thanks to a continued upward movement of stocks in October, the major U.S. stock indices are near new record highs. The strong returns are broad with the participation of small cap stocks and are supported by better than expected GDP growth, a resilient job market and an accommodative Federal Reserve. However, the valuation of the S&P 500 has increased to a level that some argue isn’t sustainable, while others argue it is not near the peak of the internet bubble. This last argument assumes the AI craze is as big as the internet, and it may turn out to be. However, the internet bubble collapse was most painful for the tech sector; and it took the Nasdaq 15 years to regain its peak after the internet bubble burst. This is the reason we hold globally diversified portfolios. Stock valuations are much more reasonable for small-cap stocks, emerging markets and international stocks, and we witnessed this shift during the third quarter.
Our recommendation is to stay disciplined with investments, tune out the news and focus on what you can control with your financial plan. We are here to help you succeed and look forward to seeing you soon.
Here is a timely piece from our friends at Dimensional on how to handle volatility:


Standardized Performance Data and Disclosures
Russell data © Russell Investment Group 1995-2022, all rights reserved. Dow Jones data provided by Dow Jones Indexes. MSCI data copyright MSCI 2022, all rights reserved. S&P data provided by Standard & Poor’s Index Services Group. The BofA Merrill Lynch Indices are used with permission; © 2022 Merrill Lynch, Pierce, Fenner & Smith Inc.; all rights reserved. Citigroup bond indices copyright 2022 by Citigroup. Barclays data provided by Barclays Bank PLC. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio.
Past performance is no guarantee of future results. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell securities. Diversification does not guarantee investment returns and does not eliminate the risk of loss.
Investing risks include loss of principal and fluctuating value. Small cap securities are subject to greater volatility than those in other asset categories. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. Sector-specific investments can also increase these risks.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, liquidity, prepayments, and other factors. REIT risks include changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and creditworthiness of the issuer.
Principal Risks:
The principal risks of investing may include one or more of the following: market risk, small companies risk, risk of concentrating in the real estate industry, foreign securities risk and currencies risk, emerging markets risk, banking concentration risk, foreign government debt risk, interest rate risk, risk of investing for inflation protection, credit risk, risk of municipal securities, derivatives risk, securities lending risk, call risk, liquidity risk, income risk. Value investment risk. Investing strategy risk. To more fully understand the risks related to investment in the funds, investors should read each fund’s prospectus.
Investments in foreign issuers are subject to certain considerations that are not associated with investment in US public companies. Investment in the International Equity, Emerging Markets Equity and the Global Fixed Income Portfolios and Indices will be denominated in foreign currencies. Changes in the relative value of these foreign currencies and the US dollar, therefore, will affect the value of investments in the Portfolios. However, the Global Fixed Income Portfolios and Indices may utilize forward currency contracts to attempt to protect against uncertainty in the level of future currency rates (if applicable), to hedge against fluctuations in currency exchange rates or to transfer balances from one currency to another. Foreign Securities prices may decline or fluctuate because of (a) economic or political actions of foreign governments, and/or (b) less regulated or liquid securities markets.
The Real Estate Indices are each concentrated in the real estate industry. The exclusive focus by Real Estate Securities Portfolios on the real estate industry will cause the Real Estate Securities Portfolios to be exposed to the general risks of direct real estate ownership. The value of securities in the real estate industry can be affected by changes in real estate values and rental income, property taxes, and tax and regulatory requirements. Also, the value of securities in the real estate industry may decline with changes in interest rate. Investing in REITS and REIT-like entities involves certain unique risks in addition to those risks associated with investing in the real estate industry in general. REITS and REIT-like entities are dependent upon management skill, may not be diversified, and are subject to heavy cash flow dependency and self-liquidations. REITS and REIT-like entities also are subject to the possibility of failing to qualify for tax free pass through of income. Also, many foreign REIT-like entities are deemed for tax purposes as passive foreign investment companies (PFICs), which could result in the receipt of taxable dividends to shareholders at an unfavorable tax rate. Also, because REITS and REIT-like entities typically are invested in a limited number of projects or in a particular market segment, these entities are more susceptible to adverse developments affecting a single project or market segment than more broadly diversified investments. The performance of Real Estate Securities Portfolios may be materially different from the broad equity market.
Fixed Income Portfolios:
The net asset value of a fund that invests in fixed income securities will fluctuate when interest rates rise. An investor can lose principal value investing in a fixed income fund during a rising interest rate environment. The Portfolio may also be affected by: call risk, which is the risk that during periods of falling interest rates, a bond issuer will call or repay a higher-yielding bond before its maturity date; credit risk, which is the risk that a bond issuer will fail to pay interest and principal in a timely manner.
Risk of Banking Concentration:
Focus on the banking industry would link the performance of the short-term fixed income indices to changes in performance of the banking industry generally. For example, a change in the market’s perception of the riskiness of banks compared to non-banks would cause the Portfolio’s values to fluctuate.
The material is solely for informational purposes and shall not constitute an offer to sell or the solicitation to buy securities. The opinions expressed herein represent the current, good faith views of Lake Tahoe Wealth Management, Inc. (LTWM) as of the date indicated and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, LTWM does not guarantee the accuracy, adequacy or completeness of such information.
Predictions, opinions, and other information contained in this presentation are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward-looking statements speak only as of the date they are made, and LTWM assumes no duty to and does not undertake to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward looking statements. No investment strategy can guarantee performance results. All investments are subject to investment risk, including loss of principal invested.
Lake Tahoe Wealth Management, Inc.is a Registered Investment Advisory Firm with the Securities Exchange Commission.